Payments Made With Credit Terms and
Ordinary Course of Business DefensePrompt Payments may be protected by the "ordinary course of busines
defense

In the face of bankruptcy, a debtor will often delay
payments to its creditors. As a result, the transfers that are the
subject of a preference action are usually those that pay invoices
much later than in the prior course of dealings between the debtor
and creditor. Under some circumstances, however, the debtor may pay
its creditor sooner than it did in the prior course. This is the
situation in the recent case of In re TWA, Inc. v. World Aviation
Supply, Inc. In TWA, the Delaware bankruptcy court decides the issue
of weather an invoice paid within credit terms is conclusively presumed
to be within the ordinary course of business between the parties.

In TWA, the creditor sold goods to the debtor on credit
terms of net thirty days. Prior to the preference period, the parties
completed seven transactions over a period of less than two years.
Of the seven invoices paid by the debtor during the prior course
of dealings, none of the invoices was paid within invoice terms.
Instead, the invoices were paid in the range of 23 to 158 days after
their due date and an average of 69 days late. In contrast, the alleged
preferential transfer paid one invoice within the 30-day credit terms.

In lieu of a trial, the parties submitted a joint trial
brief containing stipulated facts and arguments from which the court
made its decision. The creditor argued that a payment made within
credit terms is conclusively presumed to be within the ordinary course
of business. The creditor asserted that the court should not look
to the prior course of dealings, but, instead, focus solely on whether
the debtor made its payment within the contract terms. The creditor
likened its proposition to that of the holdings in many jurisdictions
that payments made beyond the payment terms are considered as falling
outside the ordinary course of business between the parties and are
presumed to be non-ordinary. The court noted, however, that such
presumption can be rebutted by an examination of the prior course
of dealings, unlike the irrebuttable presumption proffered by the
creditor.

In ruling against the creditor, the court found that
a payment made within contract terms during the preference period,
when the history of dealings between the parties was that of payments
being made well outside such terms, is far more likely to be preferential
than it is to be ordinary. In ruling against protecting all payments
made within credit terms, the court acknowledged that Congress could
have easily provided a �bright line� or presumptive rule to protect
such transfers, but did not. In the end, the court found that the
history of dealings between the parties made it clear that the alleged
preferential transfer was not at all consistent with any of the transfers
which were made in the prior course of dealings between the parties.

It is important to note the changes to the ordinary
course of business under the Bankruptcy Amendment, as the creditor
in TWA would have likely succeeded under the new laws had they been
in effect. Under the new preference laws, the subjective and objective
tests are disjunctive, meaning that a creditor must only prove one
or the other, but not both as under the current law. Under facts
such as those in TWA, a creditor could argue that payment within
credit terms is ordinary for the industry, in order to satisfy its
burden under the ordinary course of business defense (and also demonstrate
that the debt was incurred in the ordinary course). Barring extraordinary
circumstances, this should be a winning argument under the new laws,
but only time will tell.